Jan. 5 (Bloomberg) -- “You don’t try to cross a chasm in
two jumps,” goes a famous saying about the leap from a planned
economy to open markets.

Just mind the gap before you spring, advises the World
Bank’s chief economist, Justin Yifu Lin.

“If the chasm is too deep and too wide, to jump is
tantamount to suicide,” he writes in “Demystifying the Chinese
Economy,” a patriotic yet hardheaded look at how his country
notched up average annual growth of 9.9 percent for three
decades.

Lin represents a new breed of Chinese scholar, an
international policy maker with a doctorate from the University
of Chicago and a reservoir of self-assurance. Proud of his
country’s successes yet reasonably frank about its failings, he
sets forth here to correct misperceptions about China’s past and
shed light on its future. Other developing nations, he suggests,
have much to learn from China’s rapid rise out of poverty.

Based on a course Lin taught at Peking University, this
book doesn’t present the final word on the Chinese economic
“miracle.” Nor does it delve very deeply into the politics of
a country associated with tumultuous discontinuities.

What we get instead is a pragmatic history of economic
cause and effect -- an insider’s account of why China, which
dominated the world economy right into the 19th century, fell so
far behind the West and how it came roaring back in our times.

Confucius and Famine

The reason China missed the scientific and industrial
revolutions is now well known: Its rigorous civil-service
examinations, which emphasized the Four Books and Five Classics
of Confucianism, left clever and ambitious people with little
time for mathematics or scientific experiments, as Lin says.

Less understood are the disasters spawned by Mao Zedong’s
regime. Lin brings a clinical dispassion to bear on these
blunders, notably the 1959-61 agricultural catastrophe, which
led to a famine that left 30 million dead by his count (and
sparked cannibalism according to others).

Discounting hypotheses that blame the plummeting output on
bad weather or mismanagement, Lin invokes game theory to explain
what happened. The government, eager to exploit economies of
scale, had in 1956 encouraged the creation of farm cooperatives
with the slogan, “Free to join and free to exit.” As yields
swelled, the state promoted ever-larger communes, where food was
distributed according to need, not performance.

Output Plummets

Then, in 1958, the policy became compulsory, eliminating
the right to exit. That changed the game, Lin says: The ability
to withdraw had protected diligent workers and discouraged
freeloading. With the right stripped away, shirkers took
advantage of industrious workers, who quickly became less so.
Productivity plummeted.

All of this occurred while China was seeking to leap into
the league of advanced industrial economies. The attempt to
catch up proved futile, Lin says, because it defied the
country’s comparative advantages, a theme threading throughout
this book. Heavy industry requires large capital outlays and
creates relatively few jobs. Mao’s China had the opposite:
scarce capital and abundant labor.

China did manage to test an atomic bomb in the ‘60s and
launch a satellite in the ‘70s. It also paid a high price in low
living standards and inefficient state-owned enterprises that
required massive protection and support. That legacy lingers to
this day, as Lin unflinchingly shows.

Accidental Boom

It took a second generation of leaders under Deng Xiaoping
to adopt a development strategy in 1978 that tapped the
country’s comparative advantage. Seeking to win popular support
and distance itself from the murderous Gang of Four, Deng’s
administration introduced market reforms that inadvertently
encouraged rural households to take responsibility for their own
gains and losses.

Farm output soared. Impressed, the government began
extending market-oriented policies to cities in 1985. The rest
is economic history.

In sharp contrast with the shock therapy that jolted the
former Soviet Union and Eastern Europe in the 1990s, the Chinese
opted for what Lin calls “a gradual dual-track process.” This
freed private enterprises to compete in new, labor-intensive
industries yet continued to prop up state-owned companies,
shielding them from bankruptcy and severe job losses. Instead of
trying to leap the chasm in a single bound, China produced
growth that made the divide “narrower and shallower,” Lin
says.

Corrupt, Inefficient

Far from defending the state-owned monoliths, Lin describes
how they feed corruption and warp the country’s fragile
financial system. State-owned enterprises vacuum up 80 percent
of all bank loans, making it hard for private companies to get
financing, he says.

Lin is less persuasive when it comes to today’s global
economic imbalances. The blame, he says, lies less with China’s
export-led growth and undervalued currency than with U.S.
financial deregulation and the Federal Reserve’s low rates after
the dot-com bust. Well, it took two to build Chimerica.

This is the best book on China’s economy that I’ve read,
even if it emits a whiff of historical revisionism. The
country’s communist leaders would be wise to heed Lin’s advice
on how to revitalize or mothball its state enterprises. Will
these dinosaurs submit to the therapy without a shock? Somehow I
doubt it.

“Demystifying the Chinese Economy,” translated from
Chinese by Stephanie Wang, is published by Cambridge University
Press (330 pages, $27.99, 17.99 pounds). To buy this book in
North America, click here.

(James Pressley writes for Muse, the arts and leisure
section of Bloomberg News. The opinions expressed are his own.)